Author Topic: Roth vs Traditional IRA and how to get the money out  (Read 1832 times)

medinaj2160

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Roth vs Traditional IRA and how to get the money out
« on: March 13, 2015, 04:06:15 PM »
So I did some research and found the differences between the two https://investor.vanguard.com/ira/roth-vs-traditional-ira
I don't fully understand what would be most convenient in our case; hopefully one my fellow mustachians can provide some guidance.

Last year we maxed out our 401k's and traditional IRA's for the first time. I don't know if I should do the same this year. We want to retire when we hit around $750,000. I think we will get close to that number in around 6-8 years. We don't have access to an HSA but we are planning on putting a little money on a 529 let say 2k a year. We have around 80K to invest after expenses and taxes. 36K will go in the 401k's, 2k on the 529 but I don't know what to do with the rest of the money. The traditional IRA help us reduce our taxable income a little.

As of today we have $53,000 in the 401k's and $11,000 in traditional IRA's.

How would you guys invest the rest of the money? also thinking on the future, what strategy should we use to get the money when we are ready? when should we start and how? We need $30,000 a year to live.

Thanks

medinaj2160

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Re: Roth vs Traditional IRA and how to get the money out
« Reply #1 on: March 14, 2015, 09:13:59 AM »
bump.

johnhenry

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Re: Roth vs Traditional IRA and how to get the money out
« Reply #2 on: April 07, 2015, 02:46:39 PM »
I'm not certain if your $80K to invest is a one-time lump sum?  Or if that's your annual investment estimate.

Either way, if you are in the 25% tax bracket or higher it probably makes sense to fund the T-IRAs to the greatest extent possible.  Sounds like you can fully fund both 401k accounts and still have lots left over, even after funding the 529. 

It sounds like there are 2 of you.  So you have $11K that can go either a T-IRA or Roth IRA before the rest has to go to taxable accounts.  Which is better will depend on what tax bracket you are in now, how long till your retirement, how long from retirement until age 59.5, and what you expect your income (and savings in taxable accounts to be) during those years from retirement to withdrawal age.

In a nutshell, the Roth probably makes sense if you can get yourselves in the 15% bracket. If not, the T-IRA will be best.  But even in the 15% bracket the T-IRA may make sense if there's a chance you could take advantage of the tax deferral now with a likelihood of converting it to Roth soon during an early retirement year(s) with little/no other income except for the amount claimed for the Traditional -> Roth Conversion.

I'd keep the excess in a mix of index funds in a taxable account.  That taxable account can later be used to fund living expenses after early retirement but before T to Roth conversions are allowed.  I have been in a similar situation, and while it's wise to max out tax advantaged retirement accounts, when you have those loaded up to the gills, having at least some in taxable accounts offers some flexibility.

MDM

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Re: Roth vs Traditional IRA and how to get the money out
« Reply #3 on: April 07, 2015, 03:01:45 PM »
I'm not certain if your $80K to invest is a one-time lump sum?  Or if that's your annual investment estimate.
I had similar uncertainty.  Also agree w/ johnhenry's overview.

In case we are assuming some things incorrectly, see the case study sticky for content suggestions.